The Fuse

Flush with Cash, Chinese Companies Score Bargains on North American Oil Assets

by R. Kress | November 02, 2015

This month’s $1.3 billion purchase of Texas oil fields by Chinese oil production company Yantai Xinchao Industry Co. marks the latest of the Asian nation’s investments in North American energy resources. The purchase, which The Wall Street Journal unearthed from a regulatory filing, will encompass lands in the Permian basin. But with global oil prices in a slump, it seems that this development firm is looking to buy low and sell high, gambling on the assumption that prices can only go up from here.

Even with prices in a trough, investing in North American oil has produced mixed results for China in the past.

For China, investment in North American oil appears to be one possible answer to its unquenchable thirst for energy. In 2013, the country consumed 10.1 million barrels of oil a day while producing only 4.2 million barrels of oil a day. With China on its way to spending some $500 billion annually on oil imports by 2020, according to research from Wood Mackenzie, the country is facing unprecedented energy demands as the number of cars on the road is set to increase more than eight fold to 160 million. But even with prices in a trough, investing in North American oil has produced mixed results for China in the past.

The Permian Basin where Yantai Xinchao has now chosen to invest has seen a resurgence over recent years as new drilling technologies have rendered it one of the country’s most productive areas for oil recovery. Since 2007, the area has seen a 60-percent increase in output, accounting for nearly one-fifth of all crude oil production nationwide, according to the Energy Information Administration (EIA). For an investor like Yantai Xinchao—that, unlike many other energy companies, hasn’t been burdened by months on end of low oil prices—buying up assets from the hard-hit local producers may prove to be a business savvy move.

For an investor like Yantai Xinchao—that, unlike many other energy companies, hasn’t been burdened by months on end of low oil prices—buying up assets from hard-hit oil producers may prove to be a business savvy move.

Yantai Xinchao Industry Co. is far from the first Chinese investor to snap up oil assets in North America. While this latest purchase may be using low oil prices as an opportunity, some of the other Chinese deals in North America have predated this most recent slump. In February of last year, Chinese gold seller Goldleaf Jewelry Co. purchased Houston’s ERG Resources LLC for around $665 million as a means to diversify its holdings away from its base. At the time, U.S. oil and gas production was booming and prices were holding relatively steady as the economy bounced back.

There’s another common thread between these purchases. Goldleaf Jewelry’s investment is part of a trend where many of the Chinese companies choosing to invest in North American oil are not traditional energy companies. Yantai Xinchao, for example, is largely a real estate development firm without an extensive background in oil and gas.

“The emergence of non-oil or energy Chinese companies mounting billion dollar upstream deals… is a reflection of how well-capitalized some companies are in China and that they see energy as a worthwhile, long-term option to diversify their investments,” Platts China oil analytics senior analyst Yen Ling Song explained to The Fuse via email. “Yantai Xinchao does not appear to have much experience in oil and gas, which is perhaps one reason why it chose to invest in the US where resources are plentiful and the geopolitical risk is low.” Song referenced another Chinese investment company, Fosun International, that acquired Australian independent Roc Oil in 2014 for similar reasons.

However, Chinese investment companies diversifying their holdings into North American oil lands might do well to learn from the challenges now faced by state-owned CNOOC. The Chinese entity purchased Canadian oil and gas company Nexen Inc. for $15.1 billion back in 2013. But China’s biggest foreign business takeover to date has proven to be ill-fated. The high-price purchase is now beset with low crude prices and one of the least productive oil sands projects in Alberta called Long Lake. The plant has yet to ever reach its targeted output of 72,000 barrels a day.

What’s more, this summer, one of Nexen’s pipelines ruptured spilling tens of thousands of barrels of a mixture of oil and wastewater. A suspension order imposed on CNOOC as a result was only partially lifted just this month, further curbing production on the troubled oil sands project. Meantime, an investigation into the incident is ongoing.

“Compared with other parts of the world where Chinese state-owned oil companies are invested, such as Africa and Latin America, the U.S. is an open and stable market with clear fiscal and regulatory regimes.”

Despite Nexen’s setback, the U.S. still appears to be a strong investment opportunity for Chinese companies—many of which are on the hunt for acquisitions. “Chinese companies are definitely on the lookout for any oil and gas assets to acquire in the current low oil price environment,” Song said. “Compared with other parts of the world where Chinese state-owned oil companies are invested, such as Africa and Latin America, the U.S. is an open and stable market with clear fiscal and regulatory regimes.”

However, according to Song, deals like the Yantai Xinchao purchase are not likely to become a widespread trend: With or without the oil price slump, U.S. companies are not generally willing to settle for the prices that Chinese companies are seeking in order to ensure healthy returns in the long-term.

“Deals will be harder to strike because the Chinese companies will drive a hard bargain as, in this price environment, they are all much more focused on returns on investment,” Song said.

ADD A COMMENT